Question

Following figures have been extracted from Shivalika Mills Ltd.

Inventory in the beginning of the year	₹ 60,000
Inventory at the end of the year	₹ 1,00,000
Inventory Turnover Ratio	8 times
Selling price	25% above cost

Compute amount of Gross Profit and Revenue from Operations (Net Sales).

Answer 1

Average Inventory = `("Opening Inventory" + "Closing Inventory")/2`

= `(₹ 60,000  + ₹ 1,00,000)/2`

= ₹ 80,000

Inventory Turnover Ratio = `"Cost of goods Sold"/"Average Inventory"`

8 = `"Cost of goods Sold"/(₹ 80,000)`

Cost of goods Sold = ₹ 80,000 × 8

Cost of goods Sold = ₹ 6,40,000

Gross Profit = 25% on Cost

Gross Profit = `₹ 6,40,000 xx 25/100`

= ₹ 1,60,000

Revenue from Operations = Cost of Goods Sold + Gross Profit

= ₹ 6,40,000 + ₹ 1,60,000

= ₹ 8,00,000